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Thanks to a discussion with a friend one afternoon, I got thinking on the need for a marketplace to carefully breed a “middle class” among its supply side community. Middle class here refers to the group of supply side participants of the marketplace who are dependent on it for a significant part of their livelihood.

I argue here that not only is it beneficial for a marketplace to have this middle class, but it is critical that it proactively optimizes for the metric: speed at which a no-one on the marketplace can join its middle class. Let us look at why this is critical:

At the point a marketplace becomes important enough that its suppliers depend on it for livelihood, they will go above and beyond to remain competitive on it. This gives the marketplace the power to drive fundamental changes without significant resistance as long as those changes are for the benefit of the marketplace long term. An example is eBay’s transition to selling more than 80% of its products on fixed price (“Buy It Now” in eBay lingo) from being completely auction based a decade back. Initially, sellers were not willing to give up the high margins that auctions got them but when some sellers were able to increase volumes substantially based on “Buy It Now”, others made the switch pretty swiftly.

New suppliers will aspire to join the marketplace thereby allowing the marketplace to offer the buyers the choice and reliability they need. I have met a bunch of eBay sellers who have built a respectable business from scratch in less than one year. These sellers were not born experts at selling sports memorabilia, vintage dresses, etc. but they decided to experiment and learn through the process and the marketplace supported them. The first few sales made them realize that it is not that hard to sell and they never stopped.

It will prevent the supply side of the marketplace from becoming consolidated which in turn will make sure that the bargaining power of suppliers is kept under check and the marketplace earns enough margin to reinvest into the business. Air travel marketplaces have been suffering margin contraction from the ill-effects of a consolidated supplier base (airlines).

Product and business can play a big role in helping build this middle class and accelerating the speed at which more suppliers can join the middle class. One great example is Fresh Finds by Spotify which allows new undiscovered artists to get discovered. It helps Spotify to be less dependent on that one Taylor Swift who won’t put her songs on the platform. Another good example is Uber giving a 5 star rating to all drivers when they start. This means that riders don’t freak out when they are assigned a new driver. They discover that the driver is a newbie only if they talk to him or her during the ride. This obviously requires Uber to have high confidence on their own driver onboarding process. A not so obvious example is Facebook which shows you articles from publishers that your friends share irrespective of how big or small those publishers are. This allows small publishers to make a mark as long as they are producing good content.

To get an idea of a marketplace where this process worked till it stopped working, think of YouTube. How often do you watch a video from an unknown artist on YouTube? Not very often. It is true that YouTube has created some YouTube stars but those are an exception. It has started to resemble the concept of upward mobility in the US, becoming harder and harder. The web is full of articles about artists not being able to make enough money on YouTube. All the recent initiatives from YouTube around YouTube Spaces, Fan Funding and even the most recent YouTube chat are primarily focused on solving this middle class artist problem.

Building marketplaces is tough and requires many optimizations at the same time. You can build a successful business even if you don’t actively optimize for building a middle class but that business might not end up being a marketplace and it will therefore lack the flywheel that makes marketplaces incredibly resilient.